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Why Goldman Just Drastically Slashed Its Oil Price Prediction

Goldman Sachs reduced its outlook for oil prices this year citing abundant supply, Bloomberg reports, quoting a note to clients.

The investment bank’s analysts now expect Brent crude to average US$62.50 a barrel this year, down from an earlier projection of US$70 a barrel. West Texas Intermediate, according to Goldman Sachs, will average US$55.50 a barrel, compared with an earlier estimate of US$64.50 a barrel.

The price outlook revision was motivated by expectations of another glut despite the OPEC+ production cuts aimed at removing 1.2 million bpd from the global market and continued growth in U.S. shale oil production, as well as higher output in Brazil and Canada.

The bank’s analysts said, with regard to their expectations of oversupply, that OPEC produced a lot more crude oil in the last months of 2018, which means the cartel begins 2019 with more total production than it had at the beginning of last year, when larger production cuts were in effect.

What’s more, the Goldman analysts noted, pipeline bottlenecks in the Permian, which have pressured WTI previously, will likely clear faster than expected, driving a price rise in the U.S. benchmark.

“We expect that the oil market will balance at a lower marginal cost in 2019 given higher inventory levels to start the year, the persistent beat in 2018 shale production growth amidst little observed cost inflation, weaker than previously expected demand growth expectations (even at our above consensus forecasts) and increased low-cost production capacity,” analyst Daniel Courvalin wrote in the note.

The forecast update, however, comes days after the latest quarterly Dallas Fed Energy Survey revealed business activity in the U.S. oil and gas sector slowed down considerably in the fourth quarter of the year as benchmark oil prices plunged by over a quarter, suggesting shale oil production growth may slow down in 2019.

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How is Canada going to grow production with no new pipeline additions for most of the year, and the forced production cuts to begin the year that will likely continue most all of the year??

zorro6204 on January 07 2019 said:

At some point don't you just have to ignore what Goldman Sachs says about oil? I mean, how many times have their predictions come true since 2014? Once? By chance?

Harry on January 07 2019 said:

Goldman has been consistently behind the curve in its oil predictions. They insisted oil prices would close 2018 around $70 and they never budged till after the close of the year.
Question: which big advisory company has done a good job of predicting the trend?

Mamdouh G Salameh on January 07 2019 said:

I could count at least ten occasions in 2018 when Goldman Sachs changed its projection for oil prices getting it wrong in the overwhelming majority of cases. This latest prediction is no exception.

Analysts at Goldman Sachs have again based their latest prediction on faulty assumptions, namely another glut in the market and continued growth in US shale oil production.

The claim that there will be another glut in the market is wrong since the global oil market has never re-balanced completely despite the OPEC+ production cuts of 1.8 million barrels a day (mbd) in 2018. Then came Saudi Arabia’s decision (under pressure from President Trump) and Russia’s (for reasons of Its own) to jointly add 650,000 barrels a day (b/d) in June last year thus widening an already-existing small glut in the market. However, I am convinced that the recently-agreed OPEC + cuts amounting to 1.2 mbd will do the trick and reduce the glut in the market. This has recently been emphasized by Saudi Arabia cutting an estimated 639,000 b/d from its exports in December 2018 thus signalling to the global oil market its determination and that of OPEC+ to defend the oil prices. Moreover, there is evidence that Saudi Arabia is determined to take an axe to its production to ensure that it gets a price higher than $80 barrel it needs to balance its budget.

The other faulty assumption is the hyped claim about continued growth in US shale oil production. The claims by the US Energy Information Administration (EIA) that US production will exceed 12.3 mbd in 2019 is pure hype. The other claim that US oil production reached 11.7 mbd in 2018 is overstated by at least 3 mbd made up of 2 mbd of liquid gases and 1 mbd of ethanol all of which don’t qualify as crude oil. In fact International Exchanges around the world don’t consider them as substitutes for crude oil. And if the International Exchanges don’t accept them as substitutes, then they are not crude. Therefore, US oil production could have been no more than 8.7 mbd in 2018.

Just a few days ago, the Wall Street Journal (WSJ) disclosed that US shale producers have been over-hyping about the production potential from thousands of shale wells despite accusations by many authoritative organizations including MIT that the EIA has have overstating US oil production. According to the WSJ, two-thirds of projections made between 2014 and 2017 in America’s four hottest drilling regions appear to have been overly optimistic according to the analysis of some 16,000 wells operated by 29 of the biggest producers in oil basins in Texas and North Dakota.

The WSJ disclosure lends weight to comments made by top oilfield service firms ‘Schlumberger and Haliburton’ in the third quarter of last year that shale companies were slowing drilling activity. Pipeline constraints, well productivity problems and “budget exhaustion” were leading to weaker drilling conditions.

Moreover, this slowdown contradicts claims that US shale oil producers have managed to reduce their breakeven prices to the extent that they can still raise their production even if WTI remains below $50 a barrel.

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